The following invention relates to a foreign exchange trading system and, in particular, to a system for managing the risk associated with providing real-time foreign exchange trading services.
Transactions that involve more that one currency is commonplace in a global economy. For example, a manufacturer producing a product in the United States may sell the product in Japan and receive the sales price in Japanese yen. The manufacturer needs a mechanism to exchange the yen to US dollars while avoiding risks associated with fluctuations in the USD/yen exchange rate. To meet this need, markets in foreign exchange (“FX”) have emerged in which different currencies may be bought and sold thereby enabling the manufacturer to hedge its yen position. In addition to using the FX markets to facilitate global trade, the FX markets are also used by speculators to bet on the future price of a particular currency.
Typically, an investor desiring to trade foreign currencies contacts a financial institution that provides FX trading services. Initially, the investor may contact a representative of the financial institution, for example a currency trader, and request a price for a transaction involving a particular currency pair. The currency trader then evaluates a number of factors, such as the existing exchange rate between the currency pair, the size of the requested transaction and the status of the investor requesting the transaction, and provides the investor with a quote for the desired transaction. Because of the time required to generate an initial quote and the rate at which the FX markets changes, the initial quote provided by the currency trader is generally just an indicative quote and not a dealing quote upon which the trader may trade. To place a trade, the investor must request a dealing quote from the currency trader and the investor is typically given just a few seconds to actually accept a trade once a dealing price is provided by the currency trader. If the investor does not accept the trade within the allotted time, the investor must request a new dealing price quote on which to trade.
There are numerous drawbacks in the prior art FX trading process that arise primarily from the nature of the FX markets and the fact that FX price quotes are typically generated manually buy a currency trader employed by a financial institution. First, because it may take considerable time for the currency trader to provide a client with a price quote, the client has little time to decide whether to trade and in many instances won't trade based on a particular quote because of changes that occurred in the market since receiving the quote. Furthermore, because price quotes are generated manually by currency traders based on their view of the FX market at any given time, price quotes for FX transactions are often subjective and vary from currency trader to currency trader. Also, because the financial institution often must employ numerous traders to provide FX price quotes and execute transactions for their client base, providing FX services is costly.
A prior art FX trading system disclosed in U.S. Pat. No. 5,787,402 and assigned to Crossmar (the “'402 patent”), attempts to automate certain aspects of FX trading. In the '402 patent, a bank provides its customers with a system that the customers can access on-line and in real time through various terminals such as, for example, a personal computer. By inputting information in response to prompts on the screen, the system identifies the nature of the transaction the customer desires and the customer inputs the characteristics of the transaction the customer desires. The system then automatically generates an offer in response to the customer's request based upon a number of parameters including the market price, the size and nature of the transaction and the size and nature of the client. The system then promptly displays the bank's offer to the customer. The customer is then given an opportunity to accept the offer, ask that the offer be updated or reject the offer. If the customer delays for too long a period of time in deciding to accept or reject the offer, the system automatically withdraws and updates the offer thereby protecting the bank from liability for a “stale” rate. If the offer is accepted by the customer, the trade is automatically forwarded for processing including settlement and reporting.
While the '402 patent discloses a system that automates the process of generating a price quote so that the price quotes received by customers are dealing quotes, the '402 patent does not address the risks to the financial institution that result from providing real-time dealing quotes. First, at any given time, numerous dealing quotes provided by the system may be outstanding and thus, if accepted, will affect the risk position of the financial institution that is acting as a counterparty to the transactions. The '402 patent does not provide the financial institution with a method for monitoring and managing this risk.
In addition, in the real-time dealing quote system of the '402 patent, at any given time, a particular investor may have received several outstanding dealing quotes upon which the investor may trade. If the investor chooses to trade on all, or even part, of the outstanding dealing quotes, the investor credit limit may be exceeded thereby putting the institution at risk. Thus, the system disclosed in '402 patent does not effectively manage the risks associated with provided dealing FX quotes in real-time.
The system disclosed in the '402 patent is further limited to a client-server architecture in which the investor accesses any of four FX applications through corresponding graphical user-interfaces defined by the system. Thus, the investor can only access the FX applications through the pre-defined user interfaces provided by the system. The '402 patent does not, however, disclose a method by which the investor can incorporate access to the FX services into the investor's existing applications or develop new applications incorporating the FX services.
Accordingly, it is desirable to provide a method and system for flexibly providing real-time FX trading services and managing the risks associated with such services.